Small businesses warn of layoffs as new employment rights bill prompts worry

Almost every small business in the UK is preparing to cut staff in the wake of proposed changes to employment law, according to a survey by the Federation of Small Businesses (FSB).

The survey of 1,270 companies found that 92 per cent feared the new legislation would undermine recruitment and expansion plans, with nearly a third planning to reduce their workforce in the next year.

The bill, which is currently under committee scrutiny in the House of Commons, aims to address what ministers described as a power imbalance between employers and workers. Among its measures are ending zero-hour contracts, expanding statutory sick pay, strengthening union rights, and giving workers protection from unfair dismissal from the first day of their work.

Critics, especially from the small business community, say these changes could raise operating costs and erode already fragile confidence. The cost impact may be exacerbated by recent fiscal moves, including Chancellor Rachel Reeves’ £40bn tax rises and a 6.7 per cent increase in the minimum wage, both of which come into force this year.

Tina McKenzie, head of policy at the Financial Stability Board, warned that “small businesses have made it very clear” that the bill will reduce their appetite for hiring. She said they were concerned that rising legal risks around unfair dismissal claims could hamper recruitment and investment.

The Department of Business and Trade stresses that the legislation is part of a broader effort to boost living standards and drive economic growth, noting that “this government is pro-business and pro-worker.” It points to its recent steps to address late payments and boost financing for small businesses as evidence of its commitment.

Both KPMG and the Bank of England have suggested that higher government spending may provide a short-term boost to the economy, although the central bank has warned that inflation is likely to remain above target, which could weigh on growth and business sentiment in 2024 and beyond.